Show work for full points. Suppose that you invested $2,000 dollars using the do

Question

Show work for full points.

Suppose that you invested $2,000 dollars using the dollar-cost-averaging approach. Assume that on Feb-1-09, and on Feb-1-10, you purchased $1,000 worth of stock. You then held the shares until they were sold on Feb-1-2013 (assume you received the dividend in all these years and dividends were reinvested). What is the compound annual return on your investment over the holding period? Hint: create a spreadsheet of your cash flows and solve for the IRR. Note: you only get the 40 cent dividend in 2010 on the shares purchased in 2009. Assume that you get the 70 cent dividend on shares purchased in 2013 just before you sold those shares.

Explanation / Answer

no. of share bought in feb 09= 1000/50=20

no. of share in bought feb 2010= 1000/40=25

for year 0 : net cash flow = -1000 ( for purchasing bond)

for year 1 : net cash flow = -1000(for purchasing bond ) + dividend due to 20 bonds purchased earliier

so , cash flow = (20*0.4*0.4)-1000 = -996.8

year 2 :

cash flow = dividend due to 45 bonds = 45*0.5=22.5

year3 :

cash flow = dividend due to 45 bonds =    45*0.6=27

year 4 :

cash flow = cash received due to selling of 45 bonds at $80 each + dividend due to 45 bond

so net cash flow = (45*80)+ 45*0.7*0.7=3622.05

so the cash flow table is :

so the IRR for the above cash flows from the excel tool is 19.01 %

so

-1000.0000 year 0 -996.8000 year 1 22.5000 year 2 27.0000 year 3 3622.0500 year 4

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